The Dawn of PureFunds and an Encrypted Era

2014 has spelled nothing but disaster for data security. The recent onslaught of targeted cyber-attacks and virtual security breaches at major corporations including Apple, JP Morgan Chase, and Sony has prompted an international scramble among companies to pour money into revamping their cyber-security divisions. While businesses are doing damage control over breaches, observant investors are capitalizing on the pitfalls of these companies’ cyber-security models.

The first cyber-security exchange-traded fund, PureFunds ISE Cyber Security ETF (NASDAQ: HACK), launched in November 2014 and witnessed impressive results as it brought in a return of 5.3% within three weeks after launch. With impressive performance since its relatively recent inception, how can HACK upkeep their results? The answer lies in end-to-end encryption.

Niche Cyber-Security ETF

Rampant data breaches have made it glaringly apparent that the cyber-security game needs to change, and the markets reflect that realization. PureFunds HACK currently holds a little over thirty companies, two of which financial experts are especially bullish about: Fortinet (NASDAQ: FTNT) and Palo Alto Networks Inc. (NYSE: PANW). Fortinet, a mid-cap company with zero debt, has yet to announce its fourth quarter and full 2014 financial results but analysts at Northland Securities are bestowing the company with an “outperform” rating and have raised their price target. Santa Clara-based Palo Alto Networks is also blowing it out of the water thanks to hackers. The company received a buy rating from RBC Capital Markets and is expected to have a price target of $145.00 compared to its current price of $122.50. PureFunds seems to be maintaining its position as a niche cyber-security ETF with the growing success of its holdings and the distinctiveness of being the first of its kind.

Source: CNN Money

Encryption Gains Momentum

Encrypting data as it travels from point A to point B (end-to-end encryption) offers message protection throughout the delivery process. This method differs from link encryption (used by most major corporations) where data is decrypted at a central data center and then re-encrypted before reaching its destination. When hackers stole personal and credit card information from millions who shopped at major retailers in 2014 including Neiman Marcus, Home Depot, etc., they exposed the gaping loophole in the link encrypting procedure. Once the cyber-criminals maneuvered their way into the companies’ data centers, they had access to all of the consumers’ raw data as it laid in limbo between decryption and re-encryption. Cyber-security companies offering end-to-end encryption software subsequently began to raise eyebrows.

In February 2014, Atlanta-based cryptographic startup Ionic Security first started gaining traction when it garnered $25.5 million in funding from Google Ventures. After Target’s massive data breach, venture capitalists grew even more interested in increased data security. Ionic Security stresses its data-centric approach, as the security platform encrypts data at the point of conception instead of during transmission, denying the possibility of deciphering the message were it to be intercepted. Undoubtedly a result of the more recent cyber-attacks (most notably Sony’s), the firm secured another $40.1 million in series C funding a few days ago and intends to launch its company sometime April of this year with its total funding of $78.1 million. Many financial experts are praising Ionic Security as a promising cloud security company and if HACK decides to hold it when it launches, it will continue to remain a trailblazer in uprising cyber-security ETFs.

Why This Matters

Nearly 90% of all business assets today are all digital, providing hackers with a colossal pool of potential victims. Firewalls were once the backbone of business-oriented cyber-security programs, but gone are the days in which merely erecting a virtual perimeter around a network from unauthorized data transmission is enough. Businesses need to realize that technology advancement is a double-edged sword. According to a study conducted by PricewaterhouseCoopers, cyber-hacks are increasing by 66% with every year.

As hackers find new ways to carry out more intrusive attacks, it is essential for security practitioners to seek innovative methods that counteract these hacks. If businesses fail to take necessary security measures, the market will see shares of even more prominent corporations take a nosedive. End-to-end encryption is the first step towards a promising future of secured data for both consumers and organizations. Those who invest in cyber-security based funds will profit as corporations start to have a vested interest in thwarting cyber-attacks. It is becoming apparent that investors and wealth managers should consider capitalizing on the emerging industry of cyber-security, as the widely-trusted financial institutions, retailers, and healthcare companies that they both invest in and interact with will crumble without proper digital security.